A Victim of Consumers' Pain

06/23/2009 12:00 pm EST

Focus: STOCKS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says Sears Holdings is badly uncompetitive in the midst of a severe consumer recession, and its stock is vulnerable.

Suddenly, everything seems to be very rational as Wall Street "gets it" and becomes concerned about the consumer and spending.

And, when you combine the Street's awakening about consumer spending with geopolitical, interest rate, and commodity price concerns, you can see why consumer stocks are leading the market down.

The growing concern that the consumer isn't healthy, isn't recovering, and has weak spending ability means the economy is on shakier ground. Gas prices are rising, tax rebates are finished, unemployment [and] foreclosures are rising, home prices are falling, and homebuilders' confidence fell for the first time this year.

According to the Royal Bank of Canada, the consumer attitudes and spending by household index dropped 8.7 points in the first half of this month—a drop that was due to consumers' "less-than-enthusiastic feelings" about the current economy.

If you want another sign that the "green-shoots" head fake is over, last week the Federal Reserve said US households lost $1.33 trillion or 2.6 % of household net worth in the first quarter—down to the lowest level since [the third quarter of] 2004. 

When you add it all up, the consumer is, for good reasons, damaged goods. And Wall Street is finally getting it.

Sears Holdings (Nasdaq: SHLD) is a dead man walking—something you've seen for yourself if you've been in one of its stores lately. It's a truly awful company with terrible fundamentals:

1. [It’s] dead last in our last ChangeWave Alliance Research Network consumer survey. In the most recent quarter, Sears was profitable by controlling costs, but you can only do that so much and for so long.

2. Same-store sales at K-Mart and Sears were down 2.1% and 11.7%, a net of 7.4%. Same-store sales have fallen for eight consecutive years, so even a miraculous change in consumer spending habits would still not help the company.

3. Sears has terrible stores that are often badly located in malls overly dependent on nonexistent durable-goods sales.

4. Chairman Eddie Lampert is concerned with financial management, not fixing the stores, and time is running out on his management of the company. He may have pulled off a miracle with K-Mart, but not with Sears.

5. Sears is a store deep in the middle of a consumer recession that is going to last for years.

From a technical point of view, this is either a bold or a great recommendation. The stock is about to touch its 50- and 200-day moving averages. It can slice through and head down or bounce off. I believe it will slice through and down enough for us to make some serious profits.

Buy the Sears September 50 Puts (KTQUJ) under $3.10, and be ready for a quick exit with as much as a 25%-50% profit if it breaks through. (The puts traded around $3.00 Monday, while the stock closed at around $64—Editor.)

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